Deutsche Bank's Predictions on Inflation, Interest Rates, and Minimum Wage for Turkey

Deutsche Bank has maintained its constructive expectations that inflation in Turkey will enter a downward trend. The bank reported an inflation forecast of 25.4% for the end of 2025.

In its report titled "Emerging Markets 2025 Outlook," it was stated that the Turkish economy is on a path towards a soft landing. The report also shared the expectation that the minimum wage will increase by 30% at the beginning of the year, and in this context, inflation is predicted to decrease to 45% by the end of 2024 and to 25.4% by the end of 2025.

Emphasis on "gradual cooling" in the economy Deutsche Bank indicated that the Turkish economy is entering a gradual cooling process under the evaluation titled "Gradual Path to Stability." The report forecasts that economic growth this year will be at 2.9%, and tight monetary policies will limit consumption and investment demands, resulting in the Turkish economy growing below its potential until the second half of 2025.

Economic growth is expected to be at 2.8% in 2024, while a recovery in domestic demand is forecasted to strengthen in 2026, bringing the Turkish economy closer to its long-term growth trend. The report noted that these positive growth forecasts are based on the assumption of continued orthodox economic policies focused on reducing inflation, but it was expressed that a more supportive stance in policies could lead to stronger growth.

Disinflation is expected to continue next year The report indicated that due to the slowdown in domestic demand, improvement in inflation expectations, and real appreciation of the Turkish lira, inflation is expected to remain on a downward trend. It stated, “Cost pressures, inflation expectations, and domestic demand indicate that the decline in inflation will continue gradually,” predicting that under the expected economic conditions, inflation could drop below 20% by the end of 2026.

For the period after 2024, it was noted that reduced fiscal policy support, rising minimum wage, and gradually slowing domestic demand could lead to inflationary pressures above projected levels. It is anticipated that if the current policy framework is maintained, the inflation level could drop below 20% by the end of 2026.

Rate cut by the Central Bank is expected In Deutsche Bank's report, it was noted that the Central Bank of the Republic of Turkey (CBRT) is expected to implement a 250 basis point rate cut in December. The current real interest rate buffer is said to provide room for the CBRT to begin lowering the policy rate ahead of next year. The report also expressed that a continuation of the decline in inflation is anticipated in 2025, with a gradual and cautious approach expected in the easing cycle.

In this context, the policy rate is expected to decline to 37.5% in the first half of 2025 and to 30% by the end of the year. It was also mentioned in the report that while not as a base scenario, the Central Bank may implement a slower pace of interest rate cuts than 250 basis points per meeting to soften the easing cycle. Additionally, macroprudential policies such as TL deposit targets and loan ceilings are predicted to be maintained until 2025 to manage financial conditions.